This resource is hosted by the Nelson Mandela Centre of Memory, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.
02 Oct 1996: Keys, Derek
POM Mr Keys, since we last talked in November last year, would you just give me a general overview of the direction in which you think the economy is going? I read in a report just a couple of days ago that the economy appears to be slowing down after a little spurt. How do you see it going at the moment and how does the way in which you see it going affect earlier statements you have made to me like there will be very little decrease in unemployment, if any, between now and the end of the century and it doesn't really make much difference what policies are put in place or try to be put in place?
DK I wouldn't say it doesn't make much difference, but it doesn't change the order of the problem so in that respect that still represents my view. What's happened with the economy is that it's run up against some of its well known long term constraints, like the fact that we don't have enough foreign reserves to finance an unfavourable balance of payments in the absence of a fairly pronounced capital inflow. We've had our sort of little mini-Mexico on such short term capital as came into this country. Quite a lot of it has left with losses because of the change in the exchange rate, so consequently that has put us out of the favoured areas for putting even short term funds until that experience passes into the statistics and gets forgotten. So we haven't been getting any short term capital to speak of and the long term capital flow that we've been getting has remained at the fairly modest level that it has been at ever since the transition.
POM This is distinct from foreign investment, this is just capital flows?
DK Well long term foreign capital includes longer term borrowings and includes direct foreign investment. As I say, both of those have been at a modest level and there has been no change on that side. But the removal of our reserves coupled with the ongoing deficit on the balance of payments has meant that we've had to have very high real interest rates in order to restrain growth in the economy because growth in our economy has this high import content. So here we sit with high interest rates, sufficiently high I think to deter a fair amount of investment from taking place here, and with no real prospect of a change in that situation that I can see.
POM Why would high interest rates deter investment?
DK No they're not deterring them. Oh, they deter investment because you can make more money by putting your money in the bank and getting 16% than you can by going in for an investment project. The alternative becomes more attractive. And, of course, to the extent that you want to borrow money to go in for investment the cost of borrowing that money becomes higher. So this is not a new phenomenon for South Africa of course. It's something that used to be a chronic condition really even before the financial sanctions which started in 1986. Countries always run up against the balance of payments constraint and you need a really attractive policy which will successfully attract, let's say, something like 3% of gross domestic product in the form of overseas capital on a regular and a sustainable basis before you can escape from that balance of payments constraint.
POM Now this isn't helped by the continuing depreciation of the rand?
DK It is helped a bit by that because in fact that makes more of our exports more competitive and so to that extent it diminishes the deficit on the current account and, of course, it makes imports more expensive and so it exercises a restraining influence on that. Our devaluation from a trading point of view has been quite a good thing because the usual disadvantage of a depreciating currency is that internal inflation leaps up and the benefit is removed partly in the form of higher import prices and partly in the form of higher wage claims and we seem this time to be in the fortunate position where we've had a much greater depreciation of the currency than we would normally have expected, something like 20%, but in fact wage claims haven't reflected that so we're enjoying a period now in which our local costs are lower in terms of world competitiveness and that will last for as long as we can maintain that happy differential.
POM Is there a new awareness on the part of the trade union movement that there is now real necessity to moderate wage demands?
DK That's not their official position obviously but I think that underneath that message is going home. Since we last talked we've had the publication of GEAR, the Growth Employment & Reconstruction, macro-economic policy of the government, which has wage restraint as a specific part of the recipe for achieving higher economic growth and starting to reduce unemployment.
POM How realistic is that plan? It's one more plan that's been put on the table.
DK It's the first plan issued by any government for a considerable period. During my period we published what we called The Normative Economic Model, which was certainly not a plan. It was simply an illustration of the way in which the economy worked and was likely to work and the sort of things that might make it work better. But this is specific government policy which has been pronounced to be non-negotiable, in other words it's not open to being swayed by the requirements of the trade union federation, COSATU, and it's drawn very favourable comment from people like the IMF and The World Bank and so on and it is a completely market orientated world competitive type of economic policy.
POM My understanding is that it looks to the private sector as being the driving engine for growth rather than the public sector.
DK That's right, it doesn't envisage an increase in the percentage of gross domestic product that's taken in taxes and it envisages a continuing decrease in the size of the public sector deficit. Both of these are necessary because, as everyone knows these days, you can't have investment unless you have saving and the government has been the big dis-saver of the past ten years. The government has been using private savings to pay for current expenditure.
POM Has it been using private savings and foreign borrowing or just private saving?
DK Well it didn't do much foreign borrowing of course until the transition.
POM Since the transition?
DK It's quite modest. A lot of fuss was made about the Deutsche Mark bond and the Yankee bond and this that and the other, the amounts are quite small.
POM But it's absorbing a large part of domestic savings which are then not available for investment in enterprises here?
DK Correct. Quite right. The private savings go in the end into government paper and the government spends the money and that's that.
POM Is it an achievable goal to reduce, I think this year the budget deficit was to be reduced by 1%, is it possible to do this without cutting into social services, laying off teachers, nurses? I think the number of civil servants estimated to be laid off altogether is in the region of 300,000. These can't all be administrators.
DK It's possible but it's difficult. It's possible to come down to that deficit but it's I would think to some extent part of the baby will have to be thrown out with the bath water.
POM Part of the baby being?
DK Yes. There will be tightness in the health service. There will be difficulties in the pension side, welfare side. There will be tightness on the education side and so on.
POM What implications does this have for a government that is so committed to redistribution and to the delivery of basic services to millions of people who have never had basic services before? It looks to me that you're running up against a number of inherent contradictions in how you specify what priorities are and how they can be achieved.
DK I think what it means is that the reduction in services as far as the white community is concerned will have to be greater and quicker than anyone had realised.
POM I talked to one of your predecessors the other day, Barend du Plessis. In fact I've talked to every Minister of Finance since Barend du Plessis. You're the only continuous stream of ministers I have. And he said that cutting services to the developed sector, i.e. the white sector, dramatically or in a very obvious way was going to be one more deterrent to foreign investment, that when a foreign businessman came here and looked at the quality of health care available, looked at the education standards available, looked at the crime, he just packs his bags and says, "I can make as good a return some place else, I don't have to live in these conditions." Would you agree again that while you achieve A you make B more difficult?
DK Yes clearly there is a conflict. All I would say about the question of crime is that on the aluminium side of Gencor I find myself doing business in a number of countries where the crime is worse than the crime here and they don't seem to have any difficulty in attracting foreign investment. Their business community is better organised to take care of itself and to live in secure surroundings, etc., etc. So I am really more inclined to regard this as a transitional adjustment which the business community is going through and making a big palaver about while it's doing it, than as a make or break once and for all sacrifice of foreign investment.
POM I'll get to that a little bit later. I want to keep to the government's plan. What I hear you saying on the one hand that the necessary reductions in the deficit will have to be achieved in part through the cuts in services, that the brunt of those cuts will have to be borne by the white sector.
DK It's where most of the spending is even today.
POM That this will serve as a deterrent of sorts to foreign private investment, that there are other constraints on the economy that limits its capacity for growth at the best of times, and these are just structural features of the economy, they are not going to change in the next five or ten years.
DK It's a high consumption economy.
POM So within that framework it would be difficult to attain a 5% growth rate on a sustainable basis?
POM Two, even if you were to achieve a 5% growth rate there is no guarantee that that growth will generate large numbers of jobs. In fact if one looks at the experience in other countries the phenomenon is growth without the creation of jobs or even in countries that do create jobs like the United States they are all being created at the very low end of the scale, not at the middle or even top end of the scale. What kind of paradox does this present the country with in terms of, they reiterate over and over again, "We must tackle the question of unemployment", but it seems to me there is very little in fact that you can do about it?
DK Yes I think the most helpful way to think about unemployment, and for that matter to think about rates of national growth, is that anything over the 2½% to 3% rate of growth that we are now enjoying, anything over that depends on finding a way for unskilled workers to add value and this is a world-wide problem in terms of the way technology is developed and so on. The unskilled are the core of the unemployment problem in every European country and further afield as far as I know. I haven't been able to think of a way of getting unskilled people to add value other than by what's called sweat investment or sweat equity where you in fact have to organise the people into corps which can be taught to do things like improving community services, building affordable housing and that sort of thing. Now we don't seem to be making any progress in that direction, the whole feeling seems to be against it, and it's a difficult thing to organise. You need a very high level of entrepreneurial competence and you need a pretty good administration if you're going to organise that kind of national effort. Perhaps one should just say something about the unemployment, the unemployment in Gauteng is lower than the unemployment in Europe. The unemployment percentage in the Western Cape is lower than the unemployment percentage in Spain. The big unemployment is in certain areas, in the Northern Province, what we used to call the old Transvaal, and in the Eastern Cape. To a lesser extent in Natal/KwaZulu you have these huge concentrations of population which are really not unemployed within the economic stream, they are really outside the economic stream altogether. If you want to bring the inflation percentage whatever it is, and there's a fair amount of argument about exactly where that percentage is, it ranges between 20% and 40%, but if you want to bring that down by let's say a quarter you've got to take some sort of direct action in those areas and working designing that is hard enough, carrying it out successfully is a major operation. It's not clear to me how we will do that.
POM Do you think there's also, just as a result of the years of the past, the present, whatever, that there is not a strong work ethic?
DK That's not our experience in our businesses. We find our labour force is motivatable, it's very interested in participating in decisions and the kind of production that you get in the mining industry, for instance, one would hazard a guess whether there's another labour force in the world which would give you that production under those conditions. So I don't buy the work ethic. I think it's one of these urban myths.
POM You mentioned something that increasingly intrigues me and that is that we're all part of a global economy, the problems that South Africa faces with regard to employment are not unique to South Africa and one can even in a way look at a smaller paradigm. Take, say, New York City, you have Manhattan and you have the South Bronx and they are two entirely different worlds that co-exist within five miles of each other and no matter what attempts are made to resuscitate the South Bronx they just fail and you're left with this kind of underclass of people that become a permanent underclass while glittering Manhattan continues to glitter. Is that in any way an analogy for what could happen here?
DK I think we're better off in this way, in that the political picture here for blacks is so much better so that provides an avenue and it provides an interface which hardly exists in New York, apart from the exceptional individuals.
POM I'm not even saying New York, I mean if you go to London or any major city.
DK The interface here for black people is a hundred times better than in London because in fact political power resides in the hands of black elected people and you have this interface really down the entire scale. There will always be your underclass of course but there is no reason, I don't see any reason in, for instance, Johannesburg or Gauteng, I don't see any reason why we should have difficulty in carrying the integration process forward.
POM The integration of?
DK Black and white communities in the way that you have a difficulty in Brixton, in London for instance.
POM Even if you were tackling the problem from establishing these corps that you refer to, again these call for resources and again you're talking about primarily the government resources and at a time when you're saying that a necessary part of the package is to cut back on the amount of resources that are in the public sector, so you're running into another constraint.
DK Well one definition of the economic problem is it's the application of scarce means to abundant ends. It's inherent in life.
POM So when you look at the government's economic policies what do you think, looking at the short run and the long run, what should be in your view it's major economic priorities in terms of achievability and the production of results in the short run and in terms of structural reform in the longer run?
DK I can't improve on what they've announced. As I say it's in line with orthodox opinion in today's world. All I can see is that the nature of the unemployment problem and the growth problem demands some more direct action in the area of the army of unskilled than we have up to day. But when I say that I am recognising a problem without advancing a solution.
POM In terms of direction of resources and recognising that you can't do all things all the time, does the government put more resources into attempting to redress in a major way social imbalances or does it put it into activities that will attract foreign investment or that will continue to decrease the budget deficit making more domestic savings available for investment?
DK It should try to do all three.
POM But you can't cut nurses, cut the level of services. You're redistributing downwards, you're redistributing by cutting the sector that's better off.
POM While slowly improving the sector that's very poorly off.
DK I'm drafting something, I have to address an international advisory council, give them a South African update.
POM OK just give me the update.
DK So that's my first heading, and that's my second.
POM The issue progress continues.
DK Big issue, progress continues, white dissatisfaction grows. This is what's happening.
POM Would you talk about each of those, just your thoughts on each?
DK Well the big issues improving, and I last spoke to this group 18 months ago, but I say the new constitution being on track I think it will be ready in time, I think the fact that the Constitutional Court rejected the first draft is excellent. I think they have demonstrated their objectivity if you read that verdict and their independence. I think the Mandela succession issue is being addressed in terms of his decision to phase out as the head of the ANC ahead of time, next year, and advancing probably Mbeki. The IFP is back in the constitutional discussions. The National Party has left the government of national unity and become the official opposition which is a good thing because they weren't having any influence on policy in the government of national unity. Fringe parties on the left and right haven't gained support, I think that's clear from the local authority elections and the GEAR policy document, that's the macro economic one, is committed to market orientated principles and has drawn favourable comment from the IMF and The World Bank and so on. I'm going to deal with the question then of the fact that white dissatisfaction is growing. It hasn't found a political channel and it may not find a political channel, it may turn out to be a kind of business community thing.
POM When you talk about white dissatisfaction, could you be more specific?
DK Sure, the rates, the rates have gone up in Sandton, three times, and the property owners are trying to organise a rates boycott. It was inevitable that the rates in white areas would have to go up substantially. So the schools, private schools, the nearest private school to where I live is saying it will have to close next year because the government subsidy is being reduced by a quarter. As it happens it's a convent with I think 95% black pupils but it's a private school. So in various ways the effects of the change in government are still working through and of course crime is a big factor as well which I will also deal with. But the point that I then want to make is that the world moneyed forces, call them that, it's a bit too grand for what I have in mind, but the world money, if you like, really takes its cue on what it's like to invest in South Africa from the white sector. Now I'm really joining up with what Barend du Plessis said to you. Outside opinion has been sceptical from day one. I've talked to a large number of overseas people over now four or five years and scepticism has been pronounced throughout and that's now being reinforced by this adjustment.
POM So the scepticism is growing if anything.
DK It's being reinforced from inside now because of the fact that people didn't realise the extent of the adjustment that would be required. I am sure I've said this earlier on but my verdict after the election was that the whites didn't realise how much was going to change and the blacks didn't realise how little was going to change.
POM It was my first time last week, after all my years here, of going out to Sandton City. I just wanted to have a look at one more mall.
DK Consumption temple.
POM Yes. And one goes to Rosebank and one goes to, say, Sandton, Eastgate, Westgate, Northgate, Southgate, they're packed.
DK People are consuming. We're the world's champion consumers.
POM Every restaurant you go into at night any day of the week is doing good business. And places like Rosebank you've got to make your reservation before time.
DK As you know we have a very unequal distribution of income in this country.
POM But these are the people that are expressing increasing dissatisfaction but there doesn't appear to be any obvious diminution in the standard of living that they're enjoying.
DK They may even have stepped up their level of consumption in order to make them feel better, make themselves feel better. The level of consumption is enormous.
POM So what's the conundrum if you're driving a BMW, if you're financially better off than you were two years ago?
DK You don't like the risk that flows from the crime side, you don't like the fact that the property that you own is going to be levied with much higher rates. You don't like the fact that your school fees are going up, etc., etc.
POM What did whites expect to happen?
DK Don't ask me! I think they expected that their situation would be even better after the transition.
POM That it would be even better?
DK I think so. That's the only conclusion I can come to from the disappointment that's now being expressed particularly by people who take life day by day.
POM How about business scepticism? Does that exist to a similar level?
DK In the northern suburbs of Johannesburg, in Sandton and so on, there's a sort of prevailing opinion and that affects the husbands. I notice it meeting business colleagues and so on. I am hearing at second hand what my wife is hearing at first hand around the tea tables in the northern suburbs. Life is becoming less certain, standards of medical care, this, that and the other are bound to go down, a whole array of things. As we know from the introductory twenty minutes of this interview it was bound to happen.
POM Now is the brain drain a significant factor in all of this?
DK Yes it is particularly for people with young children, they are the most susceptible to doubts about the future.
POM They are most susceptible to go?
DK Yes, and South African business executives have generally had quite a wide experience compared with their counterparts in more developed countries where their focus tends to be narrower and only broadens out later in one's career. Our people are quite prized particularly if they have a pronounced skill like operating a furnace operation and that sort of thing so it's not difficult for a South African in his middle thirties to find a job somewhere else.
POM Is this being reflected in what college graduates are doing?
DK I'm not really in the picture.
POM Barend said that the whole Wits class rather than take two more years of compulsory service are going to emigrate en masse, that's the doctors.
DK I don't know how true that is. The Wits class by now is a pretty multi-coloured affair.
POM The activities that Cyril Ramaphosa is engaged in with NAIL buying out 48% of Johnnic and similar attempts to organise such enterprises, do you think this will genuinely bring about black empowerment or are we talking about the creation of a black bourgeoisie, a black elite?
DK Well you can't have the one without the other, you need the elite if you're going to get empowerment so I don't think one should view them as being in opposition to each other. Sure Cyril is part of the elite. I think it's a good deal for the kind of capital that the black interests can marshal at this stage which needs to have a fairly secure return and not be at the high risk end of the risk spectrum. So from that point of view I think it's good and it provides a platform which I think they will probably use very effectively.
POM But it does nothing in itself to create jobs?
DK No. That's correct.
POM In the same way if we come down say two and a half years or three years, we almost now entering the pre-election phase for 1999, again when one looks at the delivery of services, I mean I don't note from trip to trip any substantial progress in the delivery of particularly housing. The housing situation seems as mired down today as it was three years ago and it's probably worse because the rate of urbanisation is simply overwhelming the rate at which new houses are being built.
DK Yes the biggest single factor holding back housing development is the fact that people don't pay their bills. It's impossible to construct a housing policy if the occupiers aren't going to pay.
POM And yet the government is not making, despite it's Masakhane campaign, one, two, three, four, I don't know we could be at number eight by now, is not really making ...
DK It hasn't done the job.
POM It hasn't done it. So what has to happen in order for that culture to be broken or, again, can it be broken or is it one of those historical legacies that might take fifty years to overcome? It's just, again, a fact of life that you can do little to address despite your best intentions, your best policies and your best pleas.
DK If you want to make payment for services effective you have to be able to evict, that's what it turns on. You have to be psychologically prepared to evict, which I think probably the government is, but you have to have the administration that can evict.
POM You think the government is psychologically prepared to do so?
DK I think going right back to Joe Slovo's time as Minister of Housing, the housing policy that he and his excellent Director General, Billy Cobbett, developed envisaged that communities which didn't achieve a certain level of payment would in fact be red-lined by the government, not by the banks or by anybody else, would simply be red-lined by the government and wouldn't receive any services of any nature. So certainly there was a preparedness to tackle the problem but, of course, again we're back with something, we've got to have the preparedness but then you've also got to have the ability and I don't think at the moment that we're in a situation where the government can evict and make it stick.
POM When you say ability what do you mean?
DK You've got to have security forces, you've got to have a level of law and order observation in the community.
POM Where does this leave ...?
DK Well it means that the housing problem has to be tackled in the law and order area.
POM I hear from you both optimism and pessimism.
DK Join the club.
POM There are things that have improved and then again there are a host of problems but not unlike a host of problems that other countries face.
DK We have all the same problems but we have some of them ...
POM In exaggerated form.
DK In a worse degree, yes.
POM When you look at the political development for a moment, the constitution says it shall be a multi-party system. At least to me right now it's very obviously not what one would call a strong, viable multi-party system. You have one dominant party and you have a number of small parties, but essentially one party rules the roost and will continue to rule the roost for the foreseeable future. Do you think that a viable multi-party democracy can develop in South Africa and what must happen for it to develop?
DK I don't think my opinion is worth much on this issue but I think there will always be interests which need to be represented at the political level which are at present inside the ANC as a matter of convenience but which will in due course not be inside the ANC. The most obvious one is COSATU. I think so far they are coping with keeping the alliance going as the primary objective because they are still psychologically getting rid of apartheid mode but I think in due course when the people start asking what apartheid means or meant I think it won't be possible for them to continue in an alliance, so I think we will see at some stage the formation of a Labour Party and if that were to happen then I would guess that the ANC's vote would drop below 50%.
POM Yet only 20% of the entire work force of the country is unionised and the number of people belonging to unions is going, as is the trend elsewhere, is going down not up.
DK But they still have a pronounced effect. The number of Labour voters in the United Kingdom will be very substantially greater than the union membership in the United Kingdom where there has been loss of union power.
POM At least Tony Blair will hope so.
DK I think it's likely.
POM He may not get many union votes.
DK Those may be the ones he doesn't get.
POM So you see a realignment coming?
DK Well that's one realignment that, from my point of view, I can see as possible, but as I say on the political development side I don't think really I have much to offer.
POM Is a viable multi-party system a necessary pre-requisite for economic development or can it exist ...?
DK It's not.
POM It's not?
POM You would point to?
DK Malaysia, Indonesia, Korea.
POM Now you have The World Bank it would seem and the IMF were shifting the goal posts when it comes to making loans and are talking about there must be good governance, there must be respect for human rights, there is the attachment of social and conditions which didn't heretofore exist.
DK They don't really determine what happens politically.
POM Do you think that the private sector will contribute, I mean with this scepticism that exists, do you think the private sector will contribute sufficiently to address the structural problems the economy faces?
DK It's trying to. Bodies like the S A Foundation and so on are trying to find mechanisms so on that level I think it's making an effort and, of course, every individual business is coming to terms with the reality in which it finds itself.
POM But this phenomenon of white dissatisfaction will spill over inevitably into scepticism in terms of when it comes to making investment decisions that rather than saying well let's invest in South Africa, they might say let's invest abroad?
DK Well they don't have too much scope for that but it will certainly affect the ...
POM So if I were to ask you what are the main obstacles, just to list the main obstacles that stand in the way of substantially increasing the flow of foreign investment, of direct foreign investment, what are they and what can be done to address them, of the macro-economic plan, to address them?
DK Well there's general agreement now that the 8% of GDP that Mexico used to fund its rapid rate of growth, the investment was too high for any country. So you can probably take in about 4% of GDP in foreign capital on a safe and an ongoing basis. The IMF, and I am not disposed to argue with them, the IMF says that we need 25% of our GDP in investment if we want to grow at a rate faster than the growth of population. If foreign investment represents 4% out of the 25% the important thing for this country's economic policy to concentrate on is to get the other 21%. That's the crucial matter. Foreign investment really comes in and rides on the back of a very much more substantial local investment if we're talking about a sustainable economy and the government is perfectly correct in concentrating on trying to get the 21% from local sources effectively harnessed and marshalled. The foreign investment, if we get 21% from local sources, we will get foreign investment. There aren't particular obstacles in its way. I've instanced the fact that we do business in countries where the living conditions aren't as pleasant as they are here for business people and which are enjoying floods of foreign investment.
POM So what is inhibiting?
DK The fact that we are not able to generate ourselves a sufficient level of savings to make the investments that are needed to grow this economy.
POM That savings would come from, again, primarily?
DK The government cutting its deficit which is dis-saving and from a policy in terms of which we partly continue to encourage saving, which used to take place largely through pension funds, and possibly provide some new incentives.
POM How important is the first world white sector to this?
DK It's important, yes. If it's psychologically disaffected then obviously you would need a much higher level of possible gain.
POM Just two last questions quickly. Is the level of productivity, is productivity beginning to show any improvement?
DK Yes productivity gains have been quite good in the last couple of years.
POM The second is corruption. Is too much being made of the stories of waste and abuse and corruption in high places? Is it any higher now than it was in previous governments or is it just more of a story now than it was before?
DK The honest answer is I don't know but I think the extent of corruption in areas like the police force and so on which is being uncovered now substantially, and it relates to the previous administration and the present one, I think is substantially in excess of what any South African imagined. I don't personally have any indication of corruption by the new elite other than the odd thing that appears in the newspaper.
POM And the last thing is the HSRC poll that indicated that while for whites crime is the major concern, for blacks by a very large margin jobs were. Now considering the fact that still the major part of crime is committed in black communities does the figure (I think it was 19% listed it as their first concern), did the lowness of the figure surprise you?
DK Well as I say unemployment is very patchy so it's a question of where the survey was taken. Unemployment isn't a tremendous ...
POM This was country-wide.
DK Well was it? I would be interested to know. Did they get representation from the Eastern Cape and the Northern Province to the extent that they should have? Here are your productivity figures. You can see bugger all happening for years and then around 1993 it started to get up and it's going up quite nicely now.
POM The index in 1993 would have been?
DK The index in 1992 was 101.4 and it's gone to 104 to 107 to 110 and now half way through the year it's at 112 already, so we are getting productivity here.
POM OK, thank you.